The mortgage meltdown really has had three phases. During the period from 2000 to 2007, the country originated millions of “nontraditional” mortgages, such as option adjustable rate mortgages, interest-only loans and mortgages with no-doc loan applications.
The second phase took place from roughly 2007 until now. While we’re no longer originating toxic mortgages, we’re paying the price for the inappropriate lending practices seen in the first phase.
Now we have the potential for a new phase in the mortgage crisis. Mortgage rates are near historic lows, home prices are down more than 19 percent since 2007 and we have a growing population with relatively little new home construction. This ought to be a great formula for rising home prices, but that’s not the case.
The problem is that we have millions of homes that face foreclosure and huge numbers of lender-owned properties from recent foreclosures. This “shadow” inventory of distressed and discounted homes is the major factor that prevents increasing home values in most markets. Until these properties are sold off, rented or in some cases bulldozed, there will be too much supply in the marketplace and therefore little incentive to push up prices.
Local markets now reflect these realities. For instance, the National Association of Realtors reports that in the fourth quarter of 2012, existing home values increased in 29 major markets – but fell in 118 metro areas.
Price figures would likely be even lower if we had more foreclosures, however, foreclosure filings have slowed since late 2010 when the robo-signing scandal became public. It’s not that there are fewer foreclosures today because the economy is vastly better, but rather, we have fewer foreclosures because the system has stalled in many states. Once the foreclosure system opens up again, the number of foreclosures will increase as lenders process a backlog of distressed properties.
Then – only after the shadow inventory has been seriously reduced – can we begin to consider the possibility of higher home prices nationwide.